Disclosure requirements for supplier finance arrangements: Implications for financial reporting

Supplier Finance Arrangements (SFA), including reverse factoring and similar structures, have become an integral part of modern working capital management.

However, recent years have seen mounting regulatory and investor concern regarding the transparency of these arrangements in financial reporting. In response, in May 2023 the International Accounting Standards Board (IASB) has introduced targeted amendments to IAS 7 effective for annual periods beginning on or after 1 January 2024, to enhance disclosures and provide greater clarity on the impact of SFAs on companies’ liabilities, cash flows, and liquidity risk.

Timothy Rose, Head of Sales UK at cflox, explains which challenges companies have to face now.

Key Disclosure Requirements

The new requirements focus on enabling users of financial statements to assess the effects of SFAs on a company’s financial position and risk profile. Companies must now disclose:

• The key contractual terms of their SFAs, including payment terms, any securities or guarantees, and the nature of the arrangements.
• The carrying amount of financial liabilities that are part of SFAs, presented by line item in the balance sheet.
• The carrying amount of those liabilities for which suppliers have already received payment from finance providers as of the reporting date.
• The range of payment due dates for liabilities under SFAs and for comparable trade payables not included in such arrangements.
• The type and effect of non-cash changes in the carrying amounts of related financial liabilities.

These disclosures must be sufficiently detailed to allow users to distinguish between arrangements with different terms and to understand the company’s exposure to liquidity risk, including any concentrations of risk arising from reliance on particular finance providers.

Accounting Treatment Under IFRS 7

These amendments apply directly to IFRS. Under IFRS 7, the focus is on transparency and comparability, with management judgment required to determine whether liabilities under SFAs should be classified as trade payables or borrowings.

Materiality and fair presentation remain central, and disclosures may be required even if formal reclassification does not occur.

Strategic Implications

The regulatory focus on transparency is likely to influence the design and adoption of working capital solutions going forward. Newer models are emerging that aim to address previous shortcomings, such as limited supplier participation and complex onboarding, while minimising the triggers for extensive disclosure. Ultimately, the effectiveness of any SFA will depend on how management engages with auditors and aligns the solution with the company’s financial objectives, whether that is optimising operating cash flow, preserving EBITDA, or managing reported debt.

Working Capital Solutions in the Context of New Disclosure Requirements

As regulatory requirements for transparency increase, working capital solutions are also evolving to meet these demands. Modern solutions are designed to provide flexibility and efficiency, while minimising complexity and the need for extensive supplier onboarding, features that are particularly relevant given the new disclosure landscape.

Comparing Modern Working Capital Solutions with Traditional Supply Chain Finance

• No Supplier Onboarding Obligation:

Modern working capital solutions can include both large and small suppliers without requiring their active participation or technical integration. This broadens the reach within the supplier base, including those with strong credit ratings who may avoid classic SCF programs.

• Unchanged Payment Terms for Suppliers:

Payments to suppliers continue on the original agreed dates. The extended payment term applies exclusively to the buyer, who can defer the outflow of cash (e.g., by 60 days)

• No Adjustment of Purchasing Processes or IT Systems Required:

Implementation does not require complex IT integration or changes to procurement contracts. Companies can often use such solutions immediately, reducing administrative burden and speeding up rollout.

• Balance Sheet Effects and Flexibility in Presentation:

Depending on the structure and auditor agreement, these solutions can be classified as working capital (trade payables) or as financial liabilities. When treated as trade payables, operating cash flow and free cash flow may improve; when treated as financial liabilities, the associated fees are reported as finance expenses below EBITDA, thus preserving EBITDA.

• No Traditional Credit Liability:

Since these solutions do not involve classic borrowing, they are generally not recognised as bank liabilities under IFRS, which can have a positive effect on balance sheet ratios and covenants.

Financial Impact Overview

Depending on the priorities of the buyer, working capital solutions can be strategically positioned to strengthen the management case:

• Working Capital Optimisation: Deferred outflows, improved liquidity ratios
• Balance Sheet Management: Not classified as bank debt but, within the scope of judgment, as operating liabilities
• Capital Market KPIs / Investor Focus: EBITDA neutrality, particularly relevant for companies backed by private equity or hedge funds

Conclusion

The recent amendments to IAS 7 represent a significant step toward greater transparency and comparability in the reporting of supplier finance arrangements. At the same time, the evolution of working capital solutions offers companies new ways to manage liquidity and balance sheet metrics flexibly and efficiently, without the complexity of traditional SCF programs or the need for extensive supplier integration.

In the context of tightened disclosure requirements, such solutions are becoming increasingly attractive as they combine transparency and flexibility while addressing regulatory demands. Ultimately, the effectiveness of any working capital strategy will depend on how companies coordinate accounting treatment with their auditors and align these tools with their broader financial objectives.